In an effort to improve the chances of obtaining financing for your startup you may have heard that buying a shelf corp will open the credit floodgates for your new venture.
Sound too good to be true? Well, it is because there are many more factors that play into the creditworthiness of a company then simply its age. While the age of your business does contribute to the overall picture it should never be considered as 'the key to credit.' By sharing some insight with you on shelf corporations and what are the key business credit advantages will better prepare you in making a more educated decision if this is a strategy worth considering. Now, let’s first cover the basics.
What is a shelf corporation?
A Shelf Corporation, also known as an “Aged Corporation” (or “Aged Company” when referring to an LLC, for example) is a corporation that is already formed, but not in use, and ready for “purchase” by a new owner. There are many reasons that people purchase shelf corporations, and there are certain things to look out for when considering one of these “ready-made” corporations. Now one of the questions I’m sure you’re thinking is “Why should I purchase a shelf corporation?” Shelf corporations allow you to engage into business, credit, or real estate agreements as an established company without having to go through the long waiting period of establishing a brand new corporation. Most potential creditors or business resources are less likely to extend credit or lend to new or up-start corporations. By approaching them as an established corporation or company, the more likely your business has the opportunity to have access to credit lines, banking relationships, leases, and so on. For example, during the initial stages of building business credit there are some vendors that will only extend credit to companies that are at least two years in business. In some cases they also require a personal guarantee if the business is less than a year old.
What can shelf corporations do for your business?
By purchasing a shelf corporation that’s three or even ten years old can drastically increase the number of credit opportunities available to you. Now don’t worry if your existing corporation is less than two years old because you’ll still be able to get business credit, but the amount of banks that you can apply at will be limited.
If you’re planning on starting a corporation or setting up another corporation then this may be an option to entertain.
Shelf corporations can also offer a large increase in borrowing power as well as enhanced credibility for your business when talking to customers and lenders. Remember the age of the owners does not necessarily correspond with the age of the company. When the H.J. Heinz Company advertises that it was established in 1869, it doesn’t mean that all of the shareholders are well over 100 years old. It simply means that the company was filed in that year.
You can take advantage of similar credibility benefits when advertising to customers. The age of your company can give greater credibility to customers and lenders than a business that was recently established. So, purchasing companies with established credit and existing credit lines can give the business a big financial boost.
Here are the Top 5 Advantages of Buying a Shelf Corporation:
1. Saving time and expense of forming a brand new corporation
2. Instant access to contract and government contract bidding. Most states require that your company be in business for a specified minimum length of time.
3. Instant credibility and an appearance of corporate history.
4. More attractive to potential investors and investment capital.
5. Faster and easier access to banking relationships and business lines of credit.
As far as purchasing a shelf corporation for the purpose of obtaining a bank loan or line of credit, given the current economic conditions, banks are requiring seeing much more than simply the age of your company. There are bank ratings, credit history, NSF history, and other factors to consider especially if you request more than a $50k line of credit. So if your interest is in applying for bank financing keep in mind shelf corporations have no business history, tax returns, financials and existing revenue.
Another word of caution that you need to consider is there are many companies that sell shelf corporations that have done business in the past, DO NOT buy these! If a shelf corporation has done business in the past and you purchase it you also assume all past liabilities of that company. So if the company has had any lawsuits brought against the corporation from the past you are now liable because you now own the corporation.
It’s critically important that the shelf corporation you are considering not have any inherent or lingering liabilities. For the most part, this can be assured by looking into the history of the corporation and ensuring that the extent of its business activities was limited or nonexistent except for the application of an Employer Identification Number and maybe the formation of a bank account.